Abstract
Previous research found a negative relationship between net working capital (NWC) and firm risk without accounting for investor protection. Bangladesh is different. We find a positive relationship between NWC and firm risk in an environment with weak governance and lax protection of property rights. Higher NWC must maintain to balance firm risk. Financial reporting quality (FRQ), liquidity risk, revenue uncertainty and weak capital market access have impact on firm risk. Poor FRQ adversely affects cost of capital and also limited financing choice. Changes in NWC have a significant impact on stock performance in firms with slower sales growth and less access to external capital. Our finding’s reliability is supported by both the fixed-effects panel and GMM regressions. The results have implications for Bangladeshi investors and firm managers as well as for other emerging markets with limited capital market access, high cost of bank debt and weak enforcement of property rights.
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